Armour Residential Hit By Nomura Downgrade, Firm Says Performance Shows How Risky mREITs Can Be

Nomura's Brock Vandervliet has downgraded the rating on

from Neutral to Reduce, while lowering the price target from $23 to $16. "ARR's performance demonstrates a central risk of the mortgage REIT structure," Vandervliet said, while explaining that the company's "unsuccessful portfolio construction and high leverage" generate "persistent book value decline." In addition, the analyst mentioned that ARMOUR Residential REIT produced the worst economic return in Nomura's coverage universe in 2015 and that this trend appeared likely to continue in 2016 as well. According to the Nomura report, "Given that the sector is valued based on book value multiples, ARR presents a value trap for investors attracted by the "low valuation" while the foundation of the valuation sinks further." The analyst believes that as an Agency REIT, the company should be able to address these issues if the board and management took certain steps. The FY16 EPS estimate is set to $3.44.